5 Biggest Stock Market Crashes In India
Introduction
Stock market crashes have always been a part of financial history, shaking investor confidence and wiping out billions in market capitalization overnight. The biggest stock market crash in India can send shockwaves through the economy, causing widespread panic and uncertainty.
From the Harshad Mehta scam in 1992 to the global financial crisis of 2008, and the COVID-19 market meltdown, these crashes have left lasting impacts on investors and businesses alike.
Did you know that during the COVID-19 crash, the Indian stock market lost over INR 12 lakh crore in just a week? Understanding these historic crashes can help investors manage risks, safeguard their capital, and make informed decisions during times of volatility.
In this blog, we’ll take a deep dive into India’s five biggest stock market crashes, analyze the reasons behind them, and discuss strategies to navigate such downturns effectively.
5 Biggest Stock Market Crashes In India
1. COVID-19 Pandemic (2020)
The COVID-19 pandemic triggered one of the biggest stock market crashes in India, sending shockwaves through the financial sector. In just one week, the Sensex nosedived by 13,985 points, marking an unprecedented decline.
On March 23, 2020, both the Sensex and Nifty suffered one of their steepest single-day falls, plunging over 13% and erasing a staggering INR 13.95 lakh crore in market value. The panic was so intense that trading had to be halted just 45 minutes into the session after the Sensex hit the 10% lower circuit—a rare occurrence that happened twice in just ten days.
This crash was further exacerbated by the Yes Bank crisis, which led to a sharp decline in banking stocks, worsening investor sentiment. Fear, uncertainty, and panic selling gripped the market as the global economic downturn and nationwide lockdown deepened concerns. This event remains a stark reminder of how external shocks can lead to massive wealth erosion in the Indian stock market.
2. Demonetisation (2016)
The period between 2015 and 2016 was challenging for the Indian stock market. By February 2016, the Sensex had dropped by 26% compared to the previous eleven months, mainly due to increasing non-performing assets (NPAs) and global economic weakness.
Later in the year, demonetisation, announced on November 8, 2016, led to widespread concern about a cash crunch, resulting in frantic selling of stocks. The next day, the market hit significantly, with the Sensex and Nifty 50 plunging by over 6% in four days. Only those with long-term strategies were better equipped to weather the storm.
3. Yuan Devaluation And Brexit (2015)
On August 24, 2015, the Sensex crashed by ~6%, wiping out INR 7 lakh crore in market capitalisation. Two significant factors contributed to this crash: the devaluation of China's currency, the Yuan, to boost exports and the UK's decision to leave the European Union (Brexit).
These factors, coupled with falling oil prices and Greece's default on a debt of €1.6 billion to the International Monetary Fund, led to a significant drop in the Sensex and affected investors with global investments. This crash underscored the importance of monitoring global markets and diversifying across asset classes and geographies.
4. US Financial Crisis (2008)
The 2008 US financial crisis, triggered by the subprime mortgage crisis, had a ripple effect on the global stock market, including India.
On January 21, 2008, also known as "Black Monday," the Sensex plummeted by 1,408 points due to the fallout from the housing bubble in the US. This crisis led to an increase in US interest rates, sparking fears of a recession.
The crisis affected many investors with stakes in foreign mutual funds even more severely. By the end of 2008, the Sensex dropped from its peak of 20,645 to 9,716, a staggering 50% fall in just 12 months.
5. Harshad Mehta Scam (1992)
On April 23, 1992, Sucheta Dalal, a business journalist, exposed India's most significant financial scam, leading to the Sensex plunging by 570 points on that day, a sharp fall of ~13%. The expose wiped out almost INR 4,000 crore from investors, a considerable sum in 1992.
In the backdrop, Harshad Mehta, dubbed the "Big Bull of Dalal Street," was charged with orchestrating a series of scams exploiting loopholes in banks. For instance, Mehta pumped up the stock prices of ABC Ltd. from INR 200 to INR 9,000 (a 4400% rise) in just 2-3 months, syphoning INR 1,700 crore from banks to fund his frauds.
However, the scam was soon uncovered, leading to a massive drop in the Sensex by over 50% over one year. This scam highlighted the need for better due diligence and regulations in the financial sector.
Why Do Stock Markets Crash?
The Indian stock market recently (between 16th - 20th Dec 2024) experienced a significant decline, with the Sensex dropping over 1,100 points. This downturn was attributed to several factors, including global economic uncertainties, rising inflation, and geopolitical tensions. Such market fluctuations are not uncommon; for instance, in 2024, the Sensex experienced a notable crash following the general election results. Investors are advised to stay informed and consider these factors when making investment decisions
A stock market crash can be triggered by multiple factors, often leading to widespread panic and heavy losses for investors. Here are some major reasons why crashes occur:
1. Geopolitical Events: Wars, political instability, and international conflicts can cause global market volatility, leading to a stock market crash in India as foreign investors pull out funds due to uncertainty.
2. Speculative Bubbles: Excessive investor optimism and stock market speculation can drive prices to unsustainable levels. When the bubble bursts, a market correction follows, often leading to a sharp stock market decline.
3. Black Swan Events: Unforeseen disasters such as pandemics, financial crises, or natural calamities can disrupt the economy, triggering a market crash due to fear-driven selling.
4. Corporate Failures: Fraud, mismanagement, or high-profile bankruptcies of large corporations can lead to sector-wide downturns, contributing to an overall share market crash.
Understanding these factors can help investors manage risks and prepare for stock market volatility, preventing major financial setbacks.
Best Ways to Protect Your Portfolio During a Stock Market Crash
Here are some tips for investors to avoid significant losses during a stock market crash:
1. Diversification: Spread investments across different sectors, asset classes, and regions to mitigate losses arising due to one class by offsetting with the profits from other classes.
2. Explore Non-Market Linked Investment Options: Allocate some of your funds to non-market linked investment options like corporate bonds, securitised debt instruments (SDIs), and fractional commercial real estate (CRE) that offer fixed, predictable returns irrespective of the market volatility.
3. Regular Monitoring And Rebalancing: Keep an eye on your portfolio and adjust it according to changing market conditions.
4. Take Advantage Of Cost Averaging: Invest a fixed amount periodically to average out prices and reduce the impact of market volatility. A typical example of this is SIPs.
Protect your portfolio against a stock market crash.
Next Indian Stock Market Crash Predictions
Predicting the next stock market involves analyzing various economic indicators and expert opinions. Factors such as excessive speculation, geopolitical tensions, rising inflation, and declining economic indicators can signal potential downturns.
Investors should monitor key indicators, including GDP trends, employment rates, and market volatility, to make informed decisions. Diversifying portfolios with bonds and fixed-income securities, and maintaining a long-term investment perspective, can help mitigate risks associated with potential market instability
Conclusion
Understanding stock market crashes is crucial for investors. While market crashes can be overwhelming, it is essential not to let fear dictate investment decisions. Diversification and prudent asset allocation, including non-market-linked investment options, can help investors navigate turbulent market conditions and achieve their financial goals.
At Grip Invest, you can explore fixed, high-yielding, non-market-linked investments to protect you from market volatility.
Frequently Asked Questions On Biggest Stock Market Crashes In India
1. Where is your money safe if the stock market crashes?
Debt investments like fixed deposits, corporate bonds, LeaseX, LoanX, BondX, InvoiceX, etc., are safer alternatives during stock market crashes due to their non-market-linked nature. They are regulated and rated, offering high yields with fixed monthly/ quarterly returns.
2. How does cost averaging work?
This strategy allows investors to buy more shares when prices are low and fewer when prices are high. Over time, this can reduce the impact of market volatility and potentially generate favourable long-term returns.
References:
- The Economic Times <https://bit.ly/3Me9ZiN>
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